It’s never a good time for a sales miss, but Michael Kors Holdings Ltd.’s fiscal second-quarter shortfall came at a particularly bad time, analysts say: soon after the Versace acquisition was announced.
Michael Kors KORS, -14.62% , whose portfolio also includes the namesake brand and Jimmy Choo, reported total revenue of $1.25 billion, up from $1.15 billion last year but below the FactSet consensus for $1.26 billion.
Shares are down 15.3% in Wednesday trading.
Michael Kors brand revenue was down 0.8% and same-store sales were down in the low-single digits.
“The step back in their core fundamental Michael Kors business could not come at a worse time, as the company recently announced the acquisition of Versace — which many investors already had a problem with — and now Michael Kors carries an unfavorable trajectory right as they are about to layer in a deal that is planned to be high-single digit dilutive to year one,” wrote Wells Fargo analysts led by Ike Boruchow.
The $2.1 billion deal to buy Gianni Versace SpA was announced on Sept. 25.
Michael Kors acquired Jimmy Choo about a year ago.
The Michael Kors brand pulled back from the wholesale channel in order to cut the number of discounts on its goods and protect the brand health, a step also taken by Tapestry Inc.’s TPR, -0.05% Coach brand.
The latest results represent a step back for the Michael Kors brand, Wells Fargo says, and raises questions about the 12-to-18-month future of the brand.
“[G]iven the slowdown in the Michael Kors brand and upcoming dilution from M&A, EPS next fiscal year is likely down absent a change in trajectory,” Wells Fargo said.
Wells Fargo rates Michael Kors shares market perform with a $50 price target cut from $74.
“[A]fter slowly climbing the steep hill of recovery, Michael Kors now appears to be rolling back down in reverse,” wrote Neil Saunders, managing director of GlobalData Retail.
Saunders said he, too, is “cautious” about the Versace acquisition since the Michael Kors brand still has to establish more clear brand positioning in order to justify “luxury” status.
“This deters some potential customers and therefore limits growth from certain consumer segments looking for a more refined label,” he said.
The Versace deal could avert attention away from these problems.
“While there’s undoubtedly some economies of scale and while the power of the name pushes Michael Kors into the big league in luxury, the deal may prove to be a further distraction from fixing core problems with the main brand,” Saunders wrote.
“Despite its status, Versace is also not a brand at the pinnacle of health: there is work to be done on boosting sales and re-energizing the business.”
Michael Kors stock has tumbled 22.1% for the year to date while the S&P 500 index SPX, +2.12% has gained 5.3% for the period.